Karnataka Bank Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Record PAT, partly one-time: Highest-ever quarterly PAT of Rs. 400.33 crores, up 45.98% QoQ, aided by a change in accounting policy on the AFS book that shifted transitional adjustments out of the P&L. [3-4]
• NIM jumps 22 bps QoQ to 3.54%: The increase was driven by capital raised and interest on a tax refund, even as yield on advances continued to decline from competitive repricing.
• Retail is half the growth story, but asset quality there needs watching: ~50% of the 19.75% YoY advances growth came from retail, yet retail GNPA doubled sequentially to 4%, with management blaming a pre-COVID historical book and election-linked contractor payment delays.
• Cost-to-income pledge gets a timeline: The ratio fell to 52.76% from ~60% last quarter, and management committed to reaching sub-50% in about four quarters through centralization and a new national back office.
• What to watch next quarter: Whether the contractor segment normalizes as promised, the pace of CASA recovery from 30.54%, and if the new retail and MSME leadership can restart core retail loan growth.

Profitability & Margins

• PAT lift had a structural tailwind: The RBI-directed change in accounting policy meant transitional provisions on the AFS book were credited to reserves instead of flowing through the P&L, boosting reported PAT. This is a market-wide phenomenon, not bank-specific. [3-4]
• NIM rose despite falling yields: Yield on advances declined from 9.95% to 9.52% YoY as the historical book repriced through competitive bids and selective ROI concessions. The NIM increase to 3.54% was partly due to the Rs. 1,500 crores capital raise and retirement of Rs. 720 crores of Tier 2 bonds at 12%, plus ~Rs. 80 crores in interest on a tax refund. Management described the tax refund contribution as not very significant over the larger scenario.
• Cost-to-income improved sharply: The ratio dropped from ~60% to 52.76% QoQ, with the prior quarter carrying a one-time charge. Ongoing cost rationalization, centralization, and a new national back office in Mangalore are driving the improvement.
• ROE normalizing post-capital raise: ROE reached 14.45% versus 13.71% last quarter, which was depressed by the Rs. 1,500 crores equity raise. Management expects to stay at 15% plus for at least the next one or two quarters, inching back toward its 15-17% target range.
• Treasury income structurally limited: Under the new RBI circular, MTM gains on the AFS portfolio flow to reserves, not the P&L, capping a traditional source of earnings volatility.

Srikrishnan H: "We always said that we would be in the 15% to 17% range, but for this aberration that happened due to this capital raise. So I think we are slowly inching back into the 15% and I think we will stay at 15 plus at least for the next one or two quarters."

Asset Quality: The Two-Book Problem

• Net NPA inched up on timing, not trend: Net NPA rose slightly to 1.66% because some recoveries slated for Q1 slipped into Q2, with significant collections already received in the first two weeks of July.
• Retail GNPA doubled sequentially: Gross NPA in the retail segment moved from 2% to 4%. Management attributed at least half of overall NPA to the historical, pre-COVID book and flagged the contractor segment, where government payment delays during the election code of conduct caused stress. Normalization is expected this quarter and next.
• Restructured book shrinking steadily: Standard restructured advances fell to Rs. 1,160.94 crores from over Rs. 4,500 crores at the post-COVID peak. Combined GNPA plus restructured as a percentage of gross advances declined to 5.4%.
• Slippages from restructured pool are manageable: Of Rs. 416.49 crores in total additions to NPAs, only ~Rs. 81 crores came from the restructured book, per management. The bank expects slippages from this pool to continue their downward trend over the next 2-3 quarters.
• PCR dipped on a provisioning methodology shift: Provision coverage ratio fell 200 bps sequentially to 77.97% due to a move to account-level provisioning practiced over the last couple of quarters. Management is balancing PAT growth with prudential norms and targets a return to 80% in two quarters.
• Credit cost collapsed to 0.11%: The low print reflects lower slippages in Q1 and 20% YoY growth in net advances. The bank is targeting an annualized credit cost closer to 0.9-1.0% and says it is prepared to digest that level.

Srikrishnan H: "We want to grow profitably, we want to also be healthy, and this is the balance that we will strike as we go forward."

Deposit Strategy & CASA

• CASA ratio fell to 30.54%: Management called this a market-wide phenomenon driven by a flight of deposits from the banking system to mutual funds since October last year.
• The fix is government and product-led: The bank has integrated with Khajane-II, the Government of Karnataka's treasury system, to collect Challan receipts for GST, customs duty, and other payments. It also launched KBL WISE, a senior citizen product bundling top-up insurance, which has received good traction.
• Stickiness over price: Management is deliberately avoiding a short-term cost-of-deposits war, focusing instead on long-term stability and relationship-based liabilities. Deposit growth guidance of 13-15% is maintained.

Srikrishnan H: "We are focusing more on long-term stability and stickiness compared to a short-term cost of deposits game that some banks are playing. I don't want to name who."

Growth & Franchise Building

• Advances growth is broad-based: Gross advances grew 19.75% YoY, with ~50% coming from retail, reflecting a strategic shift toward the RAM segment. The bank also booked opportunistic large corporate advances and is building new relationships under a newly recruited Head of Corporate Business.
• Retail book classification clouds the picture: An apparent QoQ decline in the retail loan book is due to classification differences between retail agri and core retail. Management clarified that Rs. 1,290 crores of the Rs. 2,453 crores in advances growth came from retail. A breakup of retail versus agri was not provided on the call but will be published.
• New leadership arriving: A new Head of Retail and MSME is due to join in 1-2 weeks, and a Mid Corporate Head has already joined. The bank has also deployed over 100 agricultural field officers into the market.
• Co-lending and wealth management as new engines: Four co-lending partnerships are functional, with one more launching this quarter across SME, personal loans, and SHG/JLG verticals. A wealth management platform offering advisory by location is set to launch soon, built by a product team established only two quarters ago.
• Branch network expanding: 13 new branches opened in the last couple of weeks, taking the total to 940.

Guidance & Commitments

Key Metrics